Want to reform state government? Don't forget the tax expenditures.

Amid the recent talk of “resetting” the state budget, little has been mentioned about the immense costs of tax expenditures – an area of state spending equivalent to some $6.5 billion per year.

As legislators gather in Olympia this week to prepare for the upcoming legislative session, they should seriously consider reforming how they balance this cost – from  hundreds of exemptions, deductions, credits, and other tax preferences that are not routinely scrutinized during the budget process – against preserving funding for other important priorities like health care and education.

In the short run, eliminating wasteful or ineffective tax expenditures could help policymakers address the ongoing economic crisis in a more balanced and thoughtful manner.

In the long term, heightened oversight of tax expenditures could improve the overall adequacy, equity, and stability of our tax system. Most economists view tax expenditures as tax subsidies. As the graph below illustrates: Ordinary taxpayers must pay higher tax rates to make up for those businesses and individuals that receive preferential tax treatment. 

As this graph shows, without reducing revenues needed to support our vital public systems the state sales tax rate could be much lower, were it not for special tax preferences:

• The current 6.5 percent sales tax rate could be lowered to 5.3 percent simply by eliminating the sales tax exemption on personal and professional services. 
• By further eliminating tax subsidies for businesses, the general sales tax rate could be lowered to 4.2 percent – fully 2.3 percentage points lower than the current rate.

While much of the discussion over the next couple of days will focus on how lawmakers grapple with our immediate economic problems, it is imperative that the long-term adequacy and stability of our vital public systems also be considered.  Accordingly, policies that would force the legislature to routinely consider how tax expenditures impact our ability to maintain important public priorities must be part of the conversation this week. 

Stay tuned, over the next few days schmudget will feature a series of posts examining tax expenditure accountability and long-term reforms.